Whether an “Unless” Clause Is a Condition Precedent or a Condition Subsequent

In MSCD 3.248, I recommend that you not use in a contract the terms of art condition precedent and condition subsequent:

In a contract, use the term condition rather than condition precedent, which conveys the same meaning but adds an unnecessarily legalistic flavor. You should never need to use condition subsequent, meaning something that, if it occurs, would bring something else to an end—it’s safe to assume that its meaning is unclear to clients and many lawyers. Without using the label condition subsequent, simply state that if X happens, then Y will cease.

But drafters should be aware of the underlying concepts. To understand why, consider the recent opinion in Total Recall Techs. v. Luckey, No. C 15-02281 WHA, 2016 WL 199796 (N.D. Cal. Jan. 16, 2016) (PDF here). (Thanks again to man-about-town @VBalasubramani for the tip; go here for my first post about this case.)

Background

Defendant Palmer Luckey argued that he had not breached the terms of the confidentiality agreement at issue, in that the nondisclosure and exclusivity provisions had never taken effect. Here’s the relevant part of the contract (emphasis added by the court):

The Receiving party shall keep all details including drawings and part suppliers of the Head Mounted Display confidential and shall not aid any other person or entity in the design of a Head Mounted Display other than the disclosing party. Unless within a twelve month period from 1st July 2011 the receiving party has not received a minimum payment in royalties of 10,000 US dollars by the disclosing party. The exclusivity shall remain in place for a period of 10 years providing a minimum of 10,000 US dollars is paid from the disclosing party to the receiving party per annum.

Note that the second sentence is ungrammatical: it should have been a conditional clause modifying the first sentence. Here’s what the court said about it:

Luckey’s argument that the nondisclosure and exclusivity provisions of the agreement never took effect turns on the interpretation of the italicized sentence fragment above. Luckey contends that the ten thousand dollar payment contemplated therein was a contingent event that had to occur before the exclusivity and nondisclosure obligations could take effect. Seidl’s (and Total Recall’s) failure to make such a payment, Luckey argues, is fatal to Total Recall’s claim that Luckey breached the contract. Total Recall responds that its payment obligation was excused by Luckey’s alleged breach.

The use of the word “unless” tends to support Luckey’s construction of the agreement; however, the grammatical defect in the provision renders it ambiguous at the Rule 12 stage. One possibility is that the fragment was a condition subsequent, meaning the duty to maintain confidentiality evaporated after one year (if the payment was not made). Another is that it was a condition precedent, meaning the duty never arose in the first place (since no payment was made). And, while it seems clear that zero payment was ever made, the idea that Luckey frustrated such payment and thus excused it is plausible (if barely so) at the Rule 12 stage.

Interpretation

First, let’s consider how to interpret the language at issue. I suggest that Luckey’s argument doesn’t make sense. Here’s why:

Obligations can use a dynamic verb (pay, sell, terminate) or they can use a stative verb (keep, maintain, preserve). Here are two versions of an obligation using a dynamic verb plus a conditional clause, one using the subordinator if and the other the subordinator unless:

• On 1 January 2018, A shall pay B $100 if C is then living in the United States.
• On 1 January 2018, A shall pay B $100 unless C is then not living in the United States.

The meaning of both versions is clear. I offer two versions just to demonstrate that unless is the negative counterpart of if—if the matrix clause (that’s what you call the part of the sentence a conditional clause attaches to) modifies an obligation, unless serves to express when the obligation doesn’t apply. You can make if and unless equivalent by making negative the conditional clause of one or the other—hence living in with if and not living in with unless in the above examples. (There are other subordinators, including provided.)

Here are two versions using a stative-verb matrix clause, again with one conditional clause using if, the other unless:

• A shall keep the information confidential if by 1 July 2012 B has paid A $10,000.
• A shall keep the information confidential unless by 1 July 2012 B has not paid A $10,000.

The version using unless is a simplified version of the language at issue in this dispute. The version with if is clear—the obligation applies only after the condition has been satisfied. The version with unless expresses a different meaning. There’s nothing to suggest that the obligation wouldn’t apply on entry into the contract. It follows that because unless is the negative counterpart of if, in the context of a stative obligation that applies on entry into the contract, the natural reading of a conditional clause with unless is that satisfaction of the condition would mean that the party under the obligation would no longer have to comply with it.

That’s perhaps easier to see using simpler examples:

• I’ll walk your dog if you’re nice to me.
• I’ll walk your dog unless you’re not nice to me.

The first example is clear—It’s a condition to my walking your dog that you be nice to me. But it would be semantically anomalous to derive that meaning from the second example. The natural meaning is that I’ll walk your dog, but I’ll stop doing so if you’re not nice to me.

So the court was mistaken in saying that “use of the word ‘unless’ tends to support Luckey’s construction of the agreement.”

Incidentally, the court was also mistaken in saying that the grammatical defect in the provision renders it ambiguous. The only question was whether the second sentence should have been not a separate sentence but instead a condition clause modifying the first sentence. The answer is clearly yes, and in any event ambiguity doesn’t come into it.

So we have here a judge with insufficient semantic acuity to make sense of disputed contract language. That’s a commonplace; see this article, this article, and this blog post, for starters. It’s the litigator’s job to use the pleadings to steer the judge in the right direction; consulting an expert in contract language would help. That’s something I discuss in this post.

Recommendation for Contract Drafters

Critiquing how courts interpret confusing contract language has its interest, but what’s more important to anyone drafting or reviewing contracts is how you avoid this sort of fight. In this case, it’s simple enough: with an obligation containing a stative verb, it would be clearer to replace an unless conditional clause with except that and an if conditional clause, as in the second version below (the first version is the simplified version of the language at issue in this dispute):

• A shall keep the information confidential unless by 1 July 2012 B has not paid A $10,000.
• A shall keep the information confidential, except that if by 1 July 2012 B has not paid A $10,000, A will no longer be required to keep the information confidential.

The version with unless couldn’t really be said to be unclear, so why change it? Because in addition to being clear, you want to avoid fights. As was the case in this dispute, disgruntled contract parties might be tempted to use the meaning of a stative-verb matrix clause modified by an unless conditional clause as a stick to beat the other guy with in future disputes.